From 1st January 2025, changes were made to the foreign resident capital gains withholding (FRCGW) rules that will have implications for all taxpayers buying and selling property.
FRCGW must be applied on all real property sales, unless the vendor is:
- an Australian resident for tax purposes with a valid clearance certificate issued by the Australian Taxation Office at, or before settlement
Without a clearance certificate, FRCGW must be withheld from the sale proceeds by the purchaser and paid to the Australian Taxation Office
- a Foreign resident with a variation notice specifying a reduced rate of FRCGW
Without a variation, the purchaser must withhold the full rate of FRCGW from the sale price and remit that amount to the Australian Taxation Office
Prior to 1 January 2025, the property sale value threshold to require a FRCGW clearance certificate was $750,000, however this threshold has been removed. This means all properties sold will require a FRCGW clearance certificate to be obtained prior to settlement.
If a clearance certificate is not obtained, the purchaser is obligated to withhold 15% of the market value of the sale and remit this to the Australian Taxation Office. Prior to 1 January 2025 this rate was 12.5%.
The market value is usually the contract sale value however, if the purchaser and seller are not dealing at arms length then the value for FRCGW purposes will need to be determined by a professional valuer.
Taxable Australian real property requiring a clearance certificate includes:
- your home
- vacant land, buildings, residential and commercial property
- mining, quarrying or prospecting rights where they are situated in Australia
- a lease over real property in Australia
- indirect Australian real property (IARP) interests, where the holder has a right to occupy land or buildings on land.
Other types of real property-related assets, such as leases, shares that are indirect real property interests (IARPI) and options in those that aren’t listed on an official stock exchange are also subject to FRCGW.
How to avoid the withholding tax as a seller:
As an Australian resident, the easiest way to avoid the FRCGW amount being applied to your sale proceeds is to apply for the FRCGW clearance certificate from the Australian Taxation Office.
The clearance certificate is obtained by the legal owner of the property being sold and can be obtained either by yourself or with the assistance of your accountant or solicitor. You should obtain a clearance certificate as soon as you are thinking of selling and once issued they are valid for 12 months.
Failure to obtain a clearance certificate, when you are eligible to receive one, will result in 15% tax being withheld at sale. You are able to claim that tax back from the Australian Taxation Office, however, it will be upon lodgement of your tax return for the year the sale contract was signed. There can be a significant time period between selling the property and lodging your tax return to receive the 15% tax withheld.
To ensure you receive the full entitlement of funds upon sale of your property post 1 January 2025, if you are an Australian resident, obtain your FRCGW clearance certificate before settlement. For further help in this regard, discuss with your local Accru advisor.
